Business Loans

Business Loan vs. Personal Loan: Which Is Better for Your Small Business?

business loan vs personal loan

Though common sense might suggest a business loan is the most appropriate choice when you need financing for your business, personal loans remain a popular and viable option for this purpose. As with any business decision, there are pros and cons with both methods. Before you dive in, it’s important to weigh your business and personal needs and examine the potential outcomes and repercussions.

How do small business loans work?
How do personal loans for business work?
Business loans: Pros and cons
Personal loans for business: Pros and cons
Getting a business loan vs. a personal loan
Should I get a business loan or a personal loan?

How do small business loans work?

Small business loans provide funding that your business needs. A loan might fund purchasing equipment, making payroll or investing in marketing or new technology. Because business needs are so diverse, you’ll find a number of different loan options available, including term loans, equipment financing, invoice financing and loan options from the Small Business Administration (SBA).

Business loans can be short- or long-term and may require you to submit a lot of paperwork about your business, including financial statements and financial projections. They can be both secured and unsecured and will likely still depend on your personal credit history.

Business loan terms can range from just a few weeks, like with invoice factoring, to up to 25 years for SBA loans used to purchase real estate. Amounts can vary as well, with loans up to $5 million.

How do personal loans for business work?

A personal loan for business use is a bit simpler than a business loan. With a personal loan, your personal financial information will be reviewed, including your income and your credit history. Loans are typically unsecured, meaning you don’t need collateral. The loan amounts offered are generally between $1,000 to $50,000 or more and typically last for 12 to 60 months.

One notable downside to a personal loan for business expenses, however, is that if your business fails to pay back the loan, you’ll be personally liable for the outstanding loan balance.

Business loans: Pros and cons

Pros Cons
  • Personal liability can be limited should the business default
  • Can qualify for large loan amounts and extremely long repayment periods
  • Loans can be difficult to obtain without established business credit history
  • A personal guaranty may be required

Pros

There are a lot of things to consider when looking at the difference between a personal loan and business loan. Business loans can help separate your business and personal finances, which is particularly important as the business grows (and come tax time). Depending on the individual loan, business loans may limit your personal liability should the business default or encounter other financial difficulties during the loan term. You’re most likely to find business loans with limited personal liability from alternative lenders, like companies that do non-recourse receivables factoring.

The responsible use of business loans can help build your company credit history and credit score, which will open doors for other opportunities that can help you grow and expand, such as higher lending limits and trade credit with vendors and suppliers.

Cons

Business loans can be difficult to obtain if your business hasn’t established its own credit or if you have less-than-stellar personal credit. The process can be tedious and lengthy, filled with paperwork and the possibility of rejection. For a hopeful entrepreneur who wants to dive right in, waiting for loan approval might feel torturous and could mean missed business opportunities.

Additionally, depending on your situation, you still might have to provide a personal guarantee for your business loan, meaning that you are personally liable for repaying it if the business defaults.

Personal loans for business: Pros and cons

Pros Cons
  • Loans can be easier to obtain than business loans, depending on your personal credit
  • Many personal loans are unsecured, meaning you don’t need collateral
  • Lending limits are typically lower and interest rates are generally higher compared to business loans
  • You won’t build business credit through repayment

Pros

Personal loans can be easier to obtain than business loans. Lenders will usually just take a look at your personal credit score and finances when deciding whether to lend to you. Business lenders, however, will likely examine both your personal credit and business credit, your business plan and a host of other financial statements and records from your business, and this process can be time consuming.

Another benefit of using a personal loan for business purposes is that personal loans are usually unsecured: This means you don’t have to put up collateral to get the loan. If you don’t have collateral, it can be a barrier to obtaining a small business loan.

Cons

One of the pitfalls of using a personal loan for business is that the lending limits can be lower and the interest rates potentially higher as compared to typical business loans, depending on your lender. You may not be able to secure all the money you need with a personal loan, and higher interest payments could erode a percentage of your profits.

Additionally, by using a personal loan for business purposes, you are denying your business the opportunity to build its own credit, which can help you obtain additional financing options as the business grows. Plus, with a personal loan, if the business defaults, your personal credit will take a hit. A failing business and delinquent personal credit score can be difficult to recover from.

Getting a business loan vs. a personal loan

Finding and applying for a business loan

Getting a business loan can be a complex process. In addition to a lender reviewing your personal credit score, they’ll also want to review additional information including your business credit history, your business and personal financial statements, information on any collateral for the loan and how you plan to repay the loan.

When it comes to finding a business loan, you have a lot of options including banks, credit unions and online lenders.

To find a business loan you’ll want to:

  1. Research the loan types available to you. Because there are so many different loan options available, you should take the time to see what best fits your business needs.
  2. Find lenders. Each lender will have different requirements, so before applying, make sure you understand the requirements you might have to meet, such a minimum income or minimum length of time that this business has operated.
  3. Compare APR and monthly payments. When comparing loan offers look at the APR, loan term, fees and monthly payment. Consider what loan terms could work best for you.
  4. Prepare your loan documents. Loan applications require a lot of paperwork, so once you know what lenders you’d like to apply for a loan with and what they require, it’s time to start pulling together the important documents you need.
  5. Apply. The business loan application process can take weeks as lenders do a deep dive into your finances. Keep in mind, though, that just because you’ve prequalified with a lender doesn’t mean you’re guaranteed a formal approval.

Finding and applying for a personal loan for business

Applying for a personal loan can take a matter of a few business days, or as little as one depending on the lender. When you apply, the lender will consider your personal financial information, including your credit score and income. So, if you need funds for business expenses but haven’t established your company’s credit, you can lean on your personal credit when applying.

If you want to find a personal loan for your business, you’ll have the option of choosing a bank, credit union or online lender. To find a personal loan:

  • Review minimum qualification requirements. As you research lenders, you’ll find that they may have different minimum criteria you need to meet to qualify — like a specific required credit score or a certain minimum income. Note that some lenders won’t allow personal loan funds to be used for business purposes, so do a quick check for that, as well.
  • Apply for prequalification. Many personal loan lenders make it easy to compare loan terms through the prequalification process, which only requires a soft credit check, so it won’t affect your score. Prequalification can reveal the loans term you may get after the formal application process.
  • Compare loan offers. Because personal loans often have lower borrowing limits than business loans, you’ll want to make sure that you’re able to borrow enough for your business needs. You’ll also want to review the APR and monthly payments for each loan and think about your repayment plan and each lender’s fee structure.
  • Apply. Once you’ve chosen a lender, you’ll submit a formal application. This will trigger a hard credit check. The lender may also require you to provide supporting documentation, such as pay stubs.

Should I get a business loan or a personal loan?

When a business loan can make sense

  • If you need to borrow a lot of money, a business loan will likely be a better option, as lending limits are significantly higher on a business loan vs. personal loan.
  • If you don’t want your personal assets to be at stake, a business loan without a personal guarantee is going to be a better option than a personal loan. Some alternative lenders may offer loans with no personal guarantee.
  • If you want to build your business credit, a business loan can help you do that.

When a personal loan for business can make sense

  • If your business is new or hasn’t built a strong credit history yet, you may have a better chance of being approved for a personal loan, since that’s based on your personal financial history.
  • If you need money quickly, some personal loan lenders can offer funding within one business day, rather than in the weeks or months you may have to wait with some business loans.
  • If you don’t have collateral — or don’t want to use collateral — a personal loan may be a good bet, as most are unsecured.
 

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